Hi, I want to know what is meant by cross subsidies? Can you please explain it. Reference - Chapter 7 (Product design and stakeholder interest (2)) heading 1.10. Thanks.
Hi Naman Cross subsidies are where an insurer charges a different amount for policies than that determined in the pricing basis alone. It does this to spread the costs in a different way between policies, for example perhaps allocating small policies a lower expense contribution and cross subsidising this by charging larger policies slightly more. It can be done with risk too. For example, riskier applicants slightly less and less risky applicants slightly more (perhaps to keep policies affordable for the risky lives). As soon as there is any cross subsidies the insurer needs to monitor its business mix. For example, if in our risk example they wrote more risky policies than expected, the cross subsidies would lead to insufficient premiums to cover the level of risk. Hope this helps, Sarah
